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Prepayment tracking 'threshold'?

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We have a supplier that offers lab testing services. Their model is that we buy 'credits' and pay as a lump sum, then send them samples on an adhoc basis for different tests, which are paid for out of this pot.

We understand about tracking prepayments, and that ideally the expenditure would be tracked when the service is used, not when the credits are bought. However there may be a large number of small expenditures here, and it would be much less of an administrative burden to not track each and every one. (It would also obviously be beneficial to use this as a way to spend before the end of tax year, if allowed!)

Is there any guidance available on the extent to which prepayments need to be tracked? If the individual expenditures can be ignored, are there thresholds (total amount, number of individual expenditures, time period etc) that apply?

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By williams lester accountants
20th May 2022 12:34

Surely you know how much is left 'on account' at year end? If so that's all you need, if not then how do you know you are being charged correctly?

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By match 15
20th May 2022 16:40

It's a bit more complicated unfortunately. The price of a credit can change through the year, with special offers etc) though each credit has the same 'value' in terms of resulting service.

An analogy might be pay-as-you-go mobiles, where £10 one month gets you 100 minutes, but £10 the next month (special offer!) gets you 500 minutes. You'd have to do some work to convert 342 unused minutes remaining year-end to a cash value.

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By tom123
20th May 2022 12:47

From an in house management accounts perspective you are free to set whatever limit to wish.

Personally, in the context of where I work, I set the value at £1000, before I think about treating an invoice as a prepayment.

Our income is £10m though, so in a smaller setting I would set a lower limit.

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By DKB-Sheffield
20th May 2022 12:54

M R wrote:

It would also obviously be beneficial to use this as a way to spend before the end of tax year, if allowed!

Assuming it's approved, and assuming you have the funds to do it, I see no reason why it wouldn't be allowed!

Whether it is allowable as an expense for tax purposes is an entirely different question!

On the face of it I'd say 'no' as you seem to be converting one asset (cash) into another asset (deposit/ credit for future services). Whether you expense in full and prepay the residual balance, or recognise the unused balance as a debtor will likely depend on the contract with the lab.

I am, of course assuming, accruals-basis is being used!

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By match 15
20th May 2022 16:47

DKB-Sheffield wrote:

M R wrote:

Whether it is allowable as an expense for tax purposes is an entirely different question!

On the face of it I'd say 'no' as you seem to be converting one asset (cash) into another asset (deposit/ credit for future services). Whether you expense in full and prepay the residual balance, or recognise the unused balance as a debtor will likely depend on the contract with the lab.

I am, of course assuming, accruals-basis is being used!

Thanks - yes this is accruals basis, and yes by 'allowed' I was meaning in terms of HMRC/tax law.

The 'conversion of assets' description is helpful. The amount is probably the most important part I guess... I suspect you wouldn't count things like minutes on a phone contract rolling over in their prepayments, but obviously do for 'bigger' things like rent or insurance.

A related question might be about what point orders with long lead times become a prepayment, but I don't want to take things too off-topic!

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By DKB-Sheffield
20th May 2022 17:08

I think the mobile phone analogy is a little flawed in that such provision is generally on a 'use em, or lose em' basis. If I have 400/500 'free minutes' left at the end of a year (halfway through a monthly billing cycle), yet only use 200 minutes, it would be incorrect to prepay £8/£10. But, if I'd paid 6 months up front (at a cost of £10 per month - use 'em or lose 'em), 3 months in, I'd still have £30 prepaid - regardless of the number of minutes, whether used or otherwise.

However, in your case, you have bought credits at a cost and have credits remaining. Say you buy 100 credits for £1,000 (total) and have 50 credits outstanding at year end, you have 50 credits remaining at a cost of £10 each. The value of services they actual equate to is (almost) irrelevant.

To give a different example... say I buy a voucher (today) for Hilton (others are available) to be exchanged for a one-night hotel stay. The voucher costs me £100.

- If I redeem the voucher on Wednesday, the hotel room may be 'worth' £200.
- If I instead redeem the voucher on Sunday, it may only be 'worth' £80.

However, as at midnight tonight, I have an unredeemed voucher that cost me £100 AND whether I stay on Sunday, or Wednesday, that hotel room has COST me £100 (it won't cost me more or less, purely because the 'value' of the supply is different).

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By match 15
20th May 2022 19:03

OK - I can see both arguments here, and while in reality the mobile example is flawed in that minutes usually don't last forever, if they did then this would be similar to our situation, where we buy credits in batches at different prices, and end the year in credit.

Maybe not so onerous to track, since the credits get spent 'in order' and you can only be part way through one 'block' at a time -otherwise it's entirely spent or unspent. But it's still extra work, and if it was completely acceptable to treat it as a single purchase on the date of payment, it would be simpler to manage.

Though if it's a big enough amount I guess it is really just shuffling assets around, which would not wash with HMRC, so in our case I suspect we need to look to treat this as prepayments in our accounts.

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By DKB-Sheffield
20th May 2022 19:44

Not quite understanding the shuffling assets point and HMRC (who will be primarily interested in I&E).

Clearly materiality is the important issue. If you're talking £50, probably not material/ worth bothering. If you're talking £5K, it possibly is.

As it's only once per annum you're reporting to HMRC, I can't see the major issue with calculating it. You have invoices for the last purchase (or 10 purchases), you know how much you paid for each credit, you know how many credits are left. You can easily work back from there.

Admittedly if there are 100 suppliers, each with multiple invoices, each containing multiple different credit types... it's not as simple. However, in that case, I'd expect you to also have some serious reconciliation processes in place - for business management/ IC/IA if nothing else.

As you say, recognising the purchase in full, at the time of payment, with no prepayment (or other BS adjustment) is simpler. But spending (say) £10K on the last day of the year, on credits that will not be used until the following year, would not be accruals accounting. That is unlikely to be acceptable under relevant GAAP or CT legislation.

Incidentally, how would you value goods in stock? Would goods purchased on the last day of a financial year be expensed to COS? Would you include a stock figure? How would you value the stock (FIFO... maybe AVCO)? The principle is the same (or similar).

Finally, from an MA perspective, as Tom has suggested, it's all (or most) bets off (depending on who the reports are to). But for annual accounting there is a difference between doing something for 'simplicity' and doing something that produces accounts which are T&F (and CT has a few rules as well).

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By paul.benny
21st May 2022 07:30

You're overthinking it (and creating a lot of work in the process)
Nobody prepays stationery or similar consumables.

If the amounts are significant, it's perhaps a sign that either you're putting too cash into credits with your supplier or that you need to agree a different payment basis.

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